Striking the Right Chord

Thanks to partnerships and clever marketing moves, Singing Machine is making happy music

June 10, 2002, 12:00 AM EDT

Five years ago, Edward Steele, chief executive of Singing Machine Co. (SMD
), was singing the blues. Despite Steele's best efforts, his company had filed for Chapter 11 bankruptcy protection, sales were falling, the company had been delisted from Nasdaq, and investors were worried that it would soon go belly-up.

Today, Steele, 72, is hitting all the right notes. Thanks to a marketing tie-in with MTV--and a strategic shift to selling karaoke machines for home use--the company he bought with a group of investors in 1989 is thriving. In 1997, sales were only $6 million. But the company emerged from Chapter 11 the next year. For the next three years, sales grew an average of 83% annually, to $59 million last year. Earnings did even better, climbing an average 136% a year, to $9.1 million. That performance sent Singing Machine to No. 1 on BusinessWeek's Hot Growth list.

Singing Machine's fortunes turned around after Steele made the decision in the late 1990s to sell home-karaoke machines instead of $2,000 nightclub models. The high-tech home versions, which retail for less than $300, play special compact disks that let users connect the machine to TV sets and read lyrics on the screen. Last year, the best-seller was a $199.99 MTV-branded model with a 7-inch built-in TV screen.

Steele sells his machines through such retailers as Best Buy (BBY
), Toys `R' Us (TOY
), and Target (TGT
). "The key was going directly to the mass markets," says Steele, who became fascinated with karaoke machines--which play the accompaniment but omit the singing voice--after seeing their popularity in Asian bars and nightclubs in the 1980s. Steele, a native New Yorker who skipped college to work for a toymaker 50 years ago, oversees the look and design of all his machines.

That pact with MTV has allowed Singing Machine to target teenagers and adults in their early 20s. Many of the 3,000 songs Singing Machine sells separately on CDs are from artists such as Britney Spears and Ricky Martin, who appeal to a young demographic. The strategy of placing the MTV logo on the machines is so successful that Singing Machine entered into an agreement with MTV sibling Nickelodeon, aimed at an even younger group. In July, Singing Machine will launch a $49.99 Nickelodeon-branded karaoke system for the under-10 set.

Some investors worry about whether Singing Machine's growth is sustainable. "Is this a fad or the beginning of something that's here to stay?" wonders John Montgomery, portfolio manager at Bridgeway Funds, which holds 100,000 shares. Karaoke machines may yet end up next to piles of discarded pet rocks and mood rings. But for now, Steele, who owns 14.8% of the company, estimates the total home-karaoke market in the U.S. at $150 million a year.

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Steele believes Singing Machine can double its sales next year with the help of some new concepts. In July, the company brings out a $119.99 portable karaoke with a tiny built-in video camera that records a singer's performance. Later, Steele envisions karaokes with chips that record and change a singer's voice from male to female, machines with DVD players, and others that can process MP3 files. "We see no reason why this can't be a major, major company in a few years," he says.

Steele, who plans to retire next March, is grooming Singing Machine President John F. Klecha to succeed him. Meanwhile, he sees only one way the company's progress will be thwarted. "[When] people stop singing," Steele quips, "our business is gone."